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Far East Orchard Q1 earnings fall 55.4% on higher costs, drop in JV profits

MAINBOARD-LISTED property player Far East Orchard saw its earnings more than halved in the first quarter on surging finance costs and a sharp drop in share of joint-venture profits.

Net profit fell to S$3.42 million for the three months to March 31, down 55.4 per cent from S$7.67 million the year prior, according to unaudited financial statements released on Tuesday.

While revenue slipped by 3.4 per cent year-on-year to S$38 million - as a weak hospitality market in Australia and Malaysia was compounded by a softer Australian dollar - a lower cost of sales still pushed gross profit up by 4.7 per cent. The group's student housing business in Britain saw profitability improve on a higher number of occupied beds.

But - alongside an increase in distribution and marketing costs in the lead-up to two new hotel openings on Singapore's Sentosa island - finance costs nearly quadrupled to S$4.28 million, which the group attributed to higher borrowings and a higher interest rate for the sterling pound.

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Current and unsecured borrowings had increased by S$110.8 million over the quarter, thanks to borrowings used to pay for the British student housing deals.

Meanwhile, Far East Orchard's share of profit from joint ventures came in at S$169,000, a far cry from the S$4.39 million before, after the Harbourfront Balmain residential project in Sydney was fully sold and delivered to the buyers in mid-2018.

Earnings per share came in at 0.78 Singapore cent, down from 1.8 Singapore cents before, while net asset value was S$2.84 a share, compared with S$2.89 as at Dec 31, 2018.

The group noted that the near-term outlook for private homes in Singapore - where its residential projects were fully sold in 2018 - "is expected to remain subdued", while the Woods Square integrated office project is slated for completion in 2019.

Meanwhile, the 17-unit Westminster Fire Station in central London, which is the group's first residential development in Britain, is also scheduled to be completed in 2019.

Citing Britain's planned withdrawal from the European Union, Far East Orchard said: "While the group remains confident about the long-term fundamentals of the UK property market in prime residential locations, it will continue to be prudent in its investment decisions."

"The group will continue to seek real estate development or investment opportunities that fit its strategy as a diversified real estate group," it added, pointing to its student housing acquisitions in Bristol and Liverpool and the ongoing development of another such property in Brighton.

As for the hotels arm, Far East Orchard reported higher sales from the Singapore hospitality business in the quarter and said that room supply "remains relatively stable" even though demand for serviced residences is expected to stay subdued.

Far East Orchard opened Village Hotel and The Outpost Hotel on Sentosa in April, for 799 rooms under management altogether, with The Barracks Hotel on the island also set to open in 2019.

It noted that hotels are likely to face a continued slump in Australia's major cities - such as Sydney, Melbourne, Perth and Brisbane - but growing demand for serviced apartments in Germany "bodes well" for the group's Adina Apartment Hotel brand.

No dividend was recommended, unchanged from the previous year.

Far East Orchard closed up by S$0.01 or 0.78 per cent at S$1.29 before the results were announced.